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Real estate trend – banks demolishing foreclosures rather than selling?

Foreclosures- the bane of housing

Foreclosures have been a drain on the housing sector for several years now and banks have been under fire by state and federal agencies and sued by homeowners for illegal foreclosures. The shadow inventory looms over the real estate market and threatens to keep damaging prices over the coming years.

Banks have a solution

The banks have come up with a clever solution. Banks have found a way to avoid keeping a foreclosure home on the books, pay taxes to the local government, pay staff to maintain the files, pay a Realtor to list and sell the property, and hopefully regain a portion of the value of that bad investment.

Instead, they’re sending in the bulldozers and donating the land to the local government. No more taxes, no more toxic asset, the urban renewal group in the city gets some land, and homeowners aren’t threatened by a foreclosure sitting on the market for months, impacting their values. This is happening by the hundreds across the country with JPMorgan Chase nearing their 2,000th donation.

It seems like a win-win-win situation, right? The government gets land, the banks dump a bad asset and the neighborhood isn’t plagued by a foreclosure.

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Where this works

In certain neighborhoods like Detroit and Cleveland where the bulk of this is going on, the asset is in a declining area and the homes would not likely have sold for a fraction of their worth. The areas are undesirable and turning into ghettos. But what if this theory takes hold nationally and a city like Flower Mound, Texas sees bulldozers in an otherwise healthy neighborhood?

Former homeowners

Although to the banks it is irrelevant, how do you suppose the former homeowner feels? The bank would rather demolish their home than have a few missed payments.

More importantly, it has to be asked- what about the banks that judges are ordering (well after the fact) the bank to give back the home as it was illegally foreclosed? Loopholes are being found by the dozens and legitimately illegal foreclosures are being punished. What then, if the home is gone?

What about the homeowners that were told they could not get help with a modification unless they miss two payments, they miss those payments per the bank’s instructions, then the bank says they’re not eligible for a modification because they missed payments, and by the way, they’re now subject to foreclosure? Boom, demolition.

Government’s role

Distrust of government is extremely high right now and many will question the city’s intentions with their newly acquired land. Will cities use this new land for green space or will they put in two small affordable housing units where one standard home used to be? Or will zoning change?

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Why the plan makes sense (with a caveat)

Demolition of foreclosures and donating of the land to the local government makes sense, it is mostly a win situation, but only in certain areas of certain cities. If vacant foreclosures are turning into crack houses, then bulldoze away, but we should be careful to encourage demolition of endless foreclosures in areas that it could potentially damage. This can’t become the norm, it must remain the exception.

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  1. Kathleen Cosner

    August 1, 2011 at 1:07 pm

    I am in a lot of houses, in a lot of different areas in any given month. There are some that absolutely can't be rehabbed, or shouldn't be rehabbed. What they started doing in Cleveland with the Land Bank is one of the best ideas in a looooooong time. Even in Akron, the city will occasionally (no where near often enough) raze a house, and build new construction.

  2. Joe Loomer

    August 1, 2011 at 1:38 pm

    On the face of it, this seems like an adequate approach. No doubt we'll be hearing about the onesey-twosey home demolitions of the wrong properties, but it certainly could help the look of certain neighborhoods.

    I see them doing it in my subdivision? Now that's another story altogether!

    Navy Chief, Navy Pride

  3. walidmrealtor

    August 1, 2011 at 2:43 pm

    I agree some caution should be involved in this approach; however, it's also good to see some cities taking a proactive approach and land banking these properties for the good of the community. In which case, yes, by all means they should be clearing title and blight as fast they can legally do it.

  4. Manhattan Beach Agent

    August 3, 2011 at 8:54 am

    It's best that some areas have properties seized by local governments, demolitioned, and reverted to parks, or wilderness. When those areas catch up again, economically, they can reclaim the land.

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